Abstract

In November 2015, Rolls Royce Holdings PLC (Rolls-Royce) issued its 5th profit warning in a span of 20 months. Warren East (East), CEO of Rolls-Royce said earnings were expected to be lower by £650 million in 2016 and the company was contemplating a dividend cut in the near future. The shares of Rolls-Royce plunged 20% to £536.5 on the same day, the biggest share price drop for the company in 15 years. East, appointed CEO of Rolls-Royce in July 2015, had been given a mandate by the management to turn the company around. He had planned to simplify Rolls-Royce’s organizational model, streamline senior management, reduce fixed costs and add greater pace and accountability to decision making. He planned to preserve cash through savings measures in the near future. East was firm about his decision on job cuts however he was skeptical about the dividend decision. East said the final decision regarding dividend cut would be decided by the board of directors before announcing annual reports in February, 2016. The (B) case shows the board of directors announced a 50% dividend cut on February 12, 2016. Rolls-Royce shares jumped 14 percent on the London Stock Exchange the same day, the stock’s biggest daily gain since 2008.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the relevance of dividend decision to value of the company
• Analyze the factors that lead to a change in dividend policy of the company
• Understand dividend-signaling hypothesis

Keywords

Rolls Royce, Warren East, Dividend Decision, Aircraft Engine Manufacturing, Aerospace, Defence cuts, Oil Prices, Profit warning, job cuts, Dividend Policy, financial strategy, dividend signaling hypothesis